Pricing and personalization: bank’s next game changer

Amid digital disruption and a pervasive technology war, banks face enormous challenges to manage their respective businesses profitably. While the disruptive digital technology space is taking center stage in most banks’ boardroom discussions, the list of worries does not end there. That’s why banks need to focus on the most fundamental aspect of the banking industry directly related to profitability: product pricing.

Many banks have not made product pricing a key focus area. Most still adopt a cost-plus approach, while keeping an eye on competitors’ pricing.

On the other hand, the offerings look quite unidimensional from a customer point of view—as in there is hardly innovation taking place.

Customers are interested to know about personalized offers, not generic segmented offers which may or may not make sense to every individual. The need of the hour is customer-centric banking rather than products-centric banking.

What’s wrong with current picture

If we summarize findings from most banking customer surveys, we find ineffective pricing is the biggest reason why customers shift their loyalties to certain banks. Let’s look at some examples to understand what banks are focusing on to get their pricing strategies right and make them appealing for customers.

1.Taking away a perceived benefit. A recent example of customer resentment is Bank of America eliminating its digital-only banking offering and converting it into a standard checking account for customers. This means customers must now pay a monthly $12 fee if they do not maintain a daily balance of at least $1,500 or at least one direct deposit of $250 per month. Such situations are clear indications of how pricing can go wrong against thought offerings. Many customers unable to meet the criteria will look for alternatives.

2.Tailoring credit pricing. Texas Capital Bank uses price optimization techniques and demand-based pricing in the lending space and also comes up with a better understanding of the market to offer dynamic pricing.

3.Move the benefit forward. Oklahoma State Bank launched a new product sometime back called “CD1.” It is an innovative savings vehicle unlike any other in the marketplace: a certificate of deposit that pays interest to the investor on day one of the deposit. The purpose was to boost liquidity, and thereby increase customer loyalty.

4.Changing the pricing mechanism. Movenbank, a new age mobile financial service provider operating in the U.S., offers more fluid pricing through a data analytics system it has created called CRED Score. CRED Score establishes pricing for products and services based on the capacity of customers to refer others to the bank through their standing on social networks.

5.Customized by user usage. Bank of the West uses a pricing solution to analyze customer attributes, such as recent use of products, balances, geography, and demographics to create rates, fees, and service benefits. The bank is able to quickly create packages much the same way cable companies create product bundles for their customers.

How can you apply this thinking?

This emphasizes how important product pricing is from customers’ points of view. Given the situation and its gravity, let’s analyze the directions banks should likely shift towards going forward:

• New ways of looking at segmentation: Banks need to move from geography-based segmentation to more logical clusters-based segmentation with similar customer profiles.

This entails such steps as: Products must be rethought and redesigned based on analysis of customer demand. Channels should be defined based on usage base. Finally, pricing should be based on customer sensitivity to price. To achieve the above, banks need to deploy machine learning-based analytics to devise customer clusters based on commonality of behavior and preferences.

• Keep enriching customer profiles with latest data: Banks need to periodically calculate and update their customers’ total life value. The customer may have been onboarded with particular products and pricing, but that customer may not be mapped to the same factors for the next several years.

That’s why continuous augmentation of the customer profile and life value score is required. This will help identify the customer’s life stage, preferences, and social interactions, and thereby help in drawing meaningful insights about the customer’s profile and target pricing and product towards the individual.

• Loyal customers should get something more: If product design and pricing is targeted towards retaining customers, then loyalty plays a vital role.

Banks need to proactively send relevant offers and loyalty points to the customer to continuously keep them engaged. Loyalty point redemption attracts customers to act on offers for new services which they would have postponed otherwise. Augmenting loyalty prevents them from switching to other providers.

• Flexible and dynamic pricing: When it comes to product pricing, traditional banks are often bound by the fact that they operate within low margin and regulatory constraints. Hence, it is all the more important to price dynamically so net profitability is maintained.

The underlying point is that it is not necessary for customers to only be attracted by low pricing or discounts. There are many factors that impact this decision— demand, availability of similar level of service in market, and urgency of the service.

• Act as a holistic service provider: Banks need to work with third-party providers to include more unconventional services into their offerings list. One example can be a bank mortgage operation working with a third-party service provider to offer small financing options such as purchase of furniture, vehicles, and small improvements.

Traditional banks may argue against this, pointing to such financing options as credit cards. However, it is also important to arrange the items for financing. As a result, the bank becomes part of the customer’s life and something beyond only financial services. Thus banks will get the prospect leads first, contacting them before they go to any agent or dealer.

This can help banks to attract prospects at the earliest stage of the life cycle and have greater control to convert them as their customers.

Finding a tech boost

There are several commercial off the shelf solutions available in the market that specialize in product pricing. Some of them offer product-wise modularity. While one solution may not fit all, it is prudent to keep the above pricing strategy directions in mind while evaluating functional offerings of the vendors. Some key and niche players in the banking product pricing arena include Zafin, Novantas, Nomis, Suntec, and LoansLogic.

Careful analytics tools, meaningful data, and the right pricing strategy will drive profitability in the future for traditional banks. The pricing strategy should not be confined to any specific bank department. Rather it must be the collective responsibility of the marketing, sales, product management, and analytics teams, and be instilled as a culture in the banking organization.

One thing is pretty clear—there is enormous opportunity for the product pricing space to be analyzed and improved upon in the near future.

About the author

Satya Swarup Das is senior solution architect, Virtusa, with over 13 years of experience in both business and IT. He has worked in the banking domain for multiple clients across different geographies in the retail banking transformation space. His experience covers core banking, lending, cards & payments, digital banking, products and pricing, etc. He can be reached on Twitter and LinkedIn.